Growth outpaces quarter's estimates GDP rises 3.9 percent

spending, low prices keep things humming

November 25, 1998|By BLOOMBERG NEWS

WASHINGTON -- The U.S. economy grew faster than first estimated in the third quarter, fueled by a consumer spending surge and low inflation that are likely to make the current expansion the longest on record in peacetime, reports issued yesterday showed.

The gross domestic product, the total output of goods and services, rose at a 3.9 percent annual rate in the quarter, more than doubling the second-quarter pace of 1.8 percent, the Commerce Department said. A narrower-than-estimated trade deficit and stronger consumer spending on durable goods accounted for much of the upward revision from the initial estimate of a 3.3 percent gain in GDP for the quarter.

"The key message from these numbers is that fourth-quarter growth is set to be strong," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "Three-percent growth is a real possibility."

While the economy is expanding, corporate profit isn't. Third-quarter after-tax profit, reported for the first time in yesterday's GDP report, fell 1.8 percent after rising 0.6 percent in the second quarter.

Even so, if consumer spending continues to increase, as most economists expect, the current period of economic growth that started in April 1991 will exceed in January the 92-month Reagan-era expansion. The only longer expansion, between 1961 and 1969, occurred with the buildup for the Vietnam War, according to the National Bureau of Economic Research Inc., which has collected data back to 1854.

And there are few signs that inflation -- holding for the past two years at historically low levels -- will reignite soon. In the third quarter, the GDP price deflator, a measure of price increases followed by many investors, grew at a 0.8 percent annual pace. That's down from a 0.9 percent annualized increase in the both the first and second quarters and is the smallest increase since a 0.6 percent rise in the third quarter of 1959.

Earlier this year, Federal Reserve Chairman Alan Greenspan credited "near price stability" in the U.S. economy with creating a "virtuous cycle" that was feeding the expansion.

Backing up the notion of continued spending gains, the Conference Board reported yesterday that U.S. consumer confidence rose to 126.0 in November, rebounding from an 18-month low of 119.3 a month earlier.

Personal consumption rose at a 4.1 percent annual rate in the third quarter, up from a previously reported 3.9 percent gain, the GDP report showed.

While that's down from the 6.1 percent pace recorded for both the first and second quarters, it's still higher than the 3.7 percent annual rate averaged in the four quarters of 1997.

At the same time, the decline in after-tax corporate profits capped the weakest annual earnings performance in almost a decade, government figures showed. On a year-to-year basis, after-tax profits fell 6.2 percent, the largest decline since an 11.5 percent drop the fourth quarter of 1989.

"The inflation news has been so terrific, it's held down nominal revenue growth, and for most of the last year business has been squeezed by rising labor costs," said David Resler, chief economist at Nomura Securities Inc. in New York.

Profits from current production, a separate measure that adjusts for both inventory valuation and capital consumption, rose 0.4 percent in the third quarter. "While this profit increase was only slightly better than expected, the fact that profits gained at all indicates that corporations are beginning to rein in cost growth," said John Ryding, an economist at Bear Stearns & Co. in New York.

Another government report yesterday showed that factory orders for big-ticket goods fell 1.7 percent to $189.490 billion last month. It was the first drop in five months and reflected weaker demand for industrial hardware, railroad equipment, ships and primary metals, Commerce Department figures showed. That was echoed in the GDP report, which showed a 1.1 percent drop in spending on producers' durable equipment in the third quarter.

Pub Date: 11/25/98

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